Independence should be a key factor in determining the length of time a Chair should serve

Independence should be a key factor in determining the length of time a Chair should serve

Most codes of governance propose that the maximum term for a chair of a board should be no more than 9 years. Generally, that is 3 x 3 terms of 9 years which on paper seems a sensible length of time. This time can also include time as a NED. But 9 years is a pretty arbitrary number and why not 6 years or 12 years or something in between.

For example, the FRC’s UK Corporate Governance Code, which UK and Irish public companies must follow, or explain why they do not, was revamped at the start of the year and includes a requirement that chairs step down after serving on the board for nine years. The Irish Code of Practice for the Governance of State Bodies appears to suggest that 10 years should be the maximum term.

The FRC has come in for some flak of late when it was described by Sir John Kingman (who is conducting a review of it) as “a rather ramshackle house cobbled together with all sorts of extension” over time.  So perhaps we should be more circumspect when following the UK Corporate Governance Code 2018 as the guiding light given his comments.  We will have to wait and see what the impact of that review will be on the future if any of the FRC given recent audit failures such as Patisserie Valerie and Carillion in the UK.

According to Minerva Analytics, there are 110 companies in FTSE 350, that are already non-compliant with the tenure provision, and 137 have chairs who have served on the board for more than eight years.

Tim Martin, founder and chairman of JD Wetherspoon the pub chain, who has been chairman of Wetherspoons for 36 years told the Financial Times that the nine-year rule was “deeply flawed” and arbitrary. He said  “Current rules institutionalise inexperience,” he said.

The characteristics of a good chair include:

  • Integrity
  • Ability to influence others
  • Personal strength
  • Clear vision and passion for the work
  • Emotional intelligence
  • Intellect and experience
  • Courage
  • Ability to chair meetings

Once the chair loses the support of the board, shareholders or stakeholders, then his / her time is up. The longer a chair is in place the greater the likelihood that he / she will be perceived to be less independent and possible less effective. Once the chair loses the support of the board, shareholders or stakeholders, then his / her time is up.

The main activity that generally prompts bringing an independent chair on board will be bringing external investors into a company.

Activist shareholders are now paying more attention to terms of office on boards and may have been responsible for David Bonderman moving on as Chair of Ryanair after 20 pretty successful years as chair, even if he was not considered independent as his company was an investor in the company.

There is now a much greater focus on environmental, social and governance issues, as well as cyber and corporate purpose. So, the diversity of boards, breadth of experience and new blood is something that matters to investors and good succession planning at chair and director level will facilitate that.

Governance codes are now a fact of life for many organisations. If organisations do not adhere to them, they risk negative media and activist attention, increased cost of debt and equity, put state funding at risk and make it harder to attract good boardroom talent for example.

Clarity about the term of the Chair will help to increase transparency and trust in an organisation. However, there will always be a case for rational exceptions such as in a family company.

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David W Duffy – Founder and CEO

24.2.19

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